Final answer:
Third parties benefit from others getting vaccinated due to herd immunity, an effect of positive externalities. To internalize these externalities and achieve the socially optimal outcome, the government can subsidize vaccinations, shifting the demand curve to reflect the true social benefits, leading to an increase in vaccinations.
Step-by-step explanation:
Third parties benefit from the consumption of vaccine shots due to positive externalities, occurring when the actions of an individual or business have beneficial effects on third parties. In the context of flu vaccinations, third parties benefit because each vaccinated person contributes to the wider 'herd immunity,' reducing the spread of the disease and thereby protecting those who are unvaccinated or unable to get vaccinated.
To internalize this positive externality, the government can offer a subsidy for vaccinations—this ensures that the external benefits are taken into account in the market. By providing a subsidy equal to the difference between the marginal social benefit (MSB) and the marginal private benefit (MPB), the demand curve shifts to the right, from DPrivate to DSocial. This encourages more individuals to get vaccinated, increasing the quantity from QMarket to QSocial, which is the socially optimal level of vaccinations where MSB equals marginal social cost (MSC).
In practice, the vaccination subsidy brings the private incentives in line with the social benefits, leading to a more efficient market outcome. This results in greater well-being and can potentially mimic the long-term societal improvements seen with major technological innovations that exhibit positive externalities, such as during the Industrial Revolution or the rise of information technology.